The reaction of Nicolas Sarkozy and Angela Merkel at an Oct. 23 Brussels news conference highlights one of the issues policy makers must tackle at today's European Union summits. Italy's borrowing costs jumped today when the Treasury sold 10.5 billion euros ($14.6 billion) of bills and bonds, with the shorter-term securities priced to yield the most in three years. The country has to repay 298 billion euros of debt next year, more than France, Spain or any other euro member.

Berlusconi, struggling to convince investors he can tame Italy's 1.9 trillion-euro debt, agreed last night to resign by January in exchange for reforms on pensions, liberalization and bureaucracy, newspaper Repubblica reported. The agreement with Umberto Bossi, his Northern League ally, would bring elections forward to March, one year before the legislature's term ends, the paper said.

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The EU reiterated demands yesterday for Berlusconi to carry out "specific actions" to boost Italian growth, which has trailed the euro-area average for the past decade, making it harder to reduce debt of about 120 percent of economic output, second only to Greece in the region. The yield on Italy's benchmark 10-year bond is 5.96 percent, close to the 6 percent level that prompted the European Central Bank to start buying the debt in August to drive borrowing costs down from euro-era records.

The premier and Bossi, who holds the key to his coalition, also agreed last night to send a letter to the EU before today's summit explaining a plan to raise the retirement age to 67. Bossi had rejected proposals to increase the pension age during an Oct. 24 cabinet meeting.

The letter signals a plan for structural reforms that "need to be done swiftly and in a concrete way," incoming European Central Bank Governor Mario Draghi said in a speech in Rome today.

'Confused and Dramatic'

Italian government bonds are the second-worst performers of 26 sovereign debt markets over the past three months, according to indexes compiled by Bloomberg and the European Federation of Financial Analyst Societies. They've handed investors a 3.2 percent loss since July 25. Greek debt slumped 36 percent in the same period. The current situation is "confused and dramatic" on both the Italian and global fronts, Draghi said.

"The sheer size of the Italian economy and its national debt makes it both 'too big to fail' and 'too big to rescue,'" said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. European leaders "don't trust" Berlusconi, Ostwald said. "The history of his various terms as premier offers no sound rationale for trusting him."

Sarkozy said at the Oct. 23 news conference that he had confidence in "Italian authorities" to fix state finances, declining to answer a follow-up query on whether he had confidence in Berlusconi.

'No Lectures'

"Nobody can give lectures" to other EU members, Berlusconi said in an e-mailed statement on Oct. 24. "Nobody in the EU can self-nominate himself commissioner and speak in the name of elected governments."

Italian President Giorgio Napolitano criticized what he called "untimely and unpleasant public expressions" at the Brussels meeting, while urging Berlusconi to swiftly meet the EU's demands.

Berlusconi, 75, has so far failed to spell out details of the government's long-delayed growth package. While Finance Minister Giulio Tremonti announced on Sept. 29 that Italy was kicking off a "great structural reform for reducing debt" with a plan to raise as much as 40 billion euros through state-asset sales, the cabinet has yet to ratify any such plan.

"Italy needs structural reforms in many areas, for example in taxes, pensions, judicial system, the cost of politics and the public sector in general," Marinelli at Glendevon said. "I'm not convinced Berlusconi can do much within the current government in overhauling the situation."

Credit Rating

The country was downgraded by the three credit rating companies during the past month, starting with Standard & Poor's on Sept. 19, on concern Berlusconi will struggle to reduce debt amid weak growth and potential political instability. Gross domestic product rose 0.3 percent in the second quarter from the first three months of the year, when it increased 0.1 percent. The $2.3 trillion economy, the region's third largest, is slowing as global expansion wanes.

Silvio Peruzzo and Biagio Lapolla, economists at Royal Bank of Scotland Group Plc in London, said in a report yesterday that Italy may have slumped into recession in the third quarter. That would aggravate "contagion risks" that may stem from investors taking losses on Greek bonds and "the communication cacophony that would surround any premature end of the current" Italian government, they wrote.

Berlusconi, struggling to hold together his coalition, told Napolitano yesterday that he doesn't plan to resign before his term ends in 2013 and will press ahead with measures to convince European partners that Italy can tame the debt crisis, Corriere della Sera reported, without citing anyone.

Yield Premium

Investors demand a yield premium of 387 basis points to own 10-year Italian bonds rather than German bunds of similar maturity, compared with an average premium of 225 this year. The gap exceeded 400 basis points last week as European leaders struggled to convince investors they can craft an effective response to the debt ordeal.

Euro-area leaders are counting on the ECB to continue buying the bonds of debt-laden countries as a key part of the rescue effort.

The euro "is the only currency that doesn't have standing behind it, like the dollar or the pound or the yen, a lender of last resort willing to structurally defend its credibility in the face of aggressive financial markets," Berlusconi said Oct. 24. The problem "must be corrected once and for all," he said.

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